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ImageAndrea Bohnstedt, publisher of Ratio Magazine, reports on developments in the fiercely competitive African telecoms sector.
Kenya has been one of the most exciting telecoms markets in Africa and where several global innovations in the mobile industry have been launched.

Chief amongst them were Safaricom's wildly successful mobile money transfer product M-PESA and Zain's borderless One Network that initially covered Zain's Kenya, Uganda and Tanzania operations, but now stretches across Africa and the Middle East.

The two newcomers in the market, Telkom Orange and Econet/Essar's Yu have tried to gain ground against their two established competitors by competing aggressively on price. It is unlikely that both new operators will survive in their present form, but even Safaricom and Zain had some serious issues to face recently;

Safaricom's Share Price Worries

The 2008 Safaricom IPO, in which the government offered 25% of the company's shares to investors, was the largest IPO in eastern and central Africa, but the share price development disappointed especially the hopes of Kenya's small retail investors who had often taken on loans, or sold assets, to participate in the IPO. At its lowest point, the share price fell from the IPO price of KES5 to KES2.5.

The 2008 Safaricom IPO, in which the government offered 25% of the company's shares to investors, was the largest IPO in eastern and central Africa.

Les Baillie, Safaricom's Chief Investor Relations Officer, typically hosts four to five international investor groups every month. He remains confident that the company continues to be attractive for investors as there has been no mass exodus of shareholders – since the IPO, the number of shareholders have declined by at most 1.45%. Some larger foreign investors exited in August 2008 to take their premium, Baillie explained, and another reduction in foreign corporate investment occurred between September and October when the global credit crisis began to bite. Feedback from interested institutional investors is that the Safaricom share is undervalued, and still an attractive target – but in the current economic environment, funds simply do not have the liquidity to invest.

The company sees the current share price not as driven by fundamentals, but as a reflection of the global financial crisis. It is also very much in line with overall industry developments: In dollar terms, the Safaricom share has lost 53% between the IPO and March 2009 (41% in Kenya shilling terms), but it is a figure which is put in context by the Zain Kuweit share that has lost 56.25% in US dollar terms (52.9% in KWD).

That Safaricom's market share has fallen from around 88% in September to 77% at the end of December 2008 was to be expected, given Zain’s aggressive (and costly) campaign to acquire new subscribers, stated Safaricom CEO Michael Joseph, and the entry of two new competitors during the year. But the decline in market share also has to be seen in the context of continued overall growth of the subscriber base, and the company continues to add subscribers at the same rate, with active subscribers numbering 13.3m by March 2009. Many subscribers now have two or more connections from different operators.

Investor Feedback

A tentative recovery appears in sight as the Safaricom share price had risen by around 30% by mid-March from its low of KES2.50, half of the IPO price. Ricardo Couto from Nex Rubica does not see Safaricom's prospects significantly threatened: "Our expectations for Safaricom are still positive in the medium to long term as their dominance in the market is being reinforced by investments in new technologies."

"Our expectations for Safaricom are still positive in the medium to long term as their dominance in the market is being reinforced by investments in new technologies."James Addo, the CEO of Securities Africa Limited (SAL), is more cautious regarding the medium and longer-term outlook: "We feel that Safaricom is facing an assault on all fronts of its revenue model. Its overall market share will drop. Its fastest growing business, M-PESA, will be the focus of rival attacks: MTN's multi-country payment solution, Zain's system and so far two independent operators setting up in East Africa."

Zain Kenya: Stronger – and Slimmer

2008 was the year Zain Kenya stopped snoozing on the job. With the rebranding from Celtel to Zain, the establishment of the Africa headquarters in Nairobi, and a new MD for Zain Kenya, the company finally got round to clawing back – at a cost some market share from competitor Safaricom. Under new MD Rene Meza, the company introduced a number of interesting products and tariffs, including the across-network KES8 Vuka tariff. And the company is getting in shape in other ways, too.

On 30 March 2009, Zain's Africa CEO Chris Gabriel announced that a comprehensive restructuring of the group's business would be run. The press conference was heavy on management speak – rightsizing, enhancing the customer experience, brand promise, leveraging, and so on but none of the measures presented as a 'modular' management system announced were really surprising.

ImageZain Group now operates in 16 African and six Middle Eastern countries after having continuously expanded and acquired new country licenses.
The decision to standardise processes and systems across operations are to be expected, as was the decision to centralise e.g. purchasing in order to create economies of scale. Chris Gabriel stated that agreements with strategic global partners mostly in the area of technology had already been signed.

He slipped in probably the most explosive piece of news at the end of his presentation. Earlier that day, he announced, Zain Kenya had also retrenched 141 of its staff across different areas, including finance, sales, technical, and customer services, and will now operate with around 550 staff. Additional changes for staff will result from the company's decision to work more with global strategic partners, as a significant number of Zain staff will, in future, be employed directly by these strategic partners.

Gabriel was keen to emphasise that the retrenchments were part of a strategic business reorganisation whose development had predated the global economic crisis. However, in a more difficult economic environment both globally and in Kenya, and after a financial year where Zain had to spend to recover market share, the staff reductions will help to make the company leaner to address these challenges.

This article is an abbreviated version of two separate pieces:

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